Analysis of competition in wholesale electricity market in India

Abstract

Electricity is a vital necessity for our life and a critical infrastructure for the socioeconomic development of the country. There exists a strong linkage between economic growth and electricity demand. As a part of the reform agenda and to push the reforms, various initiatives have been taken in India to bring competition in the electricity sector. The increase in prices in Wholesale Electricity Market in India(WEMI) necessitates the need for study to assess the competition and market power in WEMI. The present structure of electricity sector in India, dominated by public sector, is divided into five regions; eastern, north-eastern, northern, southern and western. There exist acute peak and energy shortages in all the regions. The unevenly dispersed resources of power generation, widely distributed demand requirement, wide fluctuations in the requirement of power in different seasons and projected capacity addition provides the potential for trading in WEMI. The trading mechanism used in WEMI, where prices are determined based on demand and supply, are: trading through short-term/ medium-term bilateral contracts, Unscheduled Interchange (UI) and power exchange. For measuring the market power, Concentration ratio, Herfindahl- Hirschman Index (HHI), Supply Margin Assessment, Residual Supply Index and Lerner Index have been used, which shows the existence of market power and indicates the possibility of its exercise for increase in the prices in WEMI. The analysis of prices in power exchange, UI and bilateral trading shows the exercise of market power for increase in prices in WEMI. The study indicates that the States, which have peak and energy power shortages and are drawing power under UI for sale in power exchange, may be making undue profit. The study suggests various policy recommendations such as maximum price ceiling, public data release, reducing the demand-supply gap, developing adequate transmission capacity and regulatory governance.